Kerry Group’s outlook divides investors: short-sellers sceptical, analysts bullish

Kerry Group’s share price has been falling steadily since July 2021, from a high of €130 to its current price of around €81.

There are a number of factors. Many are external, such as broad market forces like the rise of anti-obesity drugs, which has hit the food sector hard in the shortterm. Some of it is internal, including the relative underperformance of Kerry’s Dairy Ireland division.

But it all raises questions over where Kerry’s share price will go next. These are questions of great pertinence to farmers and small shareholders across the country, and the answer depends on who you listen to.

For example, GLG Partners, a hedge fund based in London, appear to believe the answer is down. GLG, which is part of the enormous Man Group, an investment firm with around $35 billion in assets under management, have a short-bet against the company’s shares.

A short trade is a risky transaction in which traders borrow shares from a broker and sell them on the open market, betting that the price will fall sufficiently to allow them to buy new shares at a lower price and return them to the broker, pocketing the difference as profit on the trade.

And it’s not the first encounter with short-sellers that Kerry has had in recent years. In 2019 an outfit called Shadowfall Capital and Research announced a short-trade based on questions it had over Kerry’s acquisitions strategy.

Two years later the company lost €2bn of its market capitalisation when a mysterious outfit called Ontake Research published a 30-page report on the company’s acquisitions strategy. Quite who was behind Ontake was never established, and Kerry regained about €1bnworth of market value in the aftermath.

Bigger, better-known names have also have taken bites at the company in recent years, convinced the price will fall. Data compiled by Central Bank shows that firms who have shorted Kerry have included London-based hedge fund Greenvale Capital and Marshall Wace, which has more than $60bn in assets under management.

Dropped

Not all short-trades are successful, of course, and Kerry’s share price has gone up and down over those years, so it’s not clear whether those trades either made money or lost money as the share price has dropped over the last two years.

That said, not everyone believes the share price is reflective of Kerry’s overall performance, and a survey of a number of equity analyst reports shows a good deal of positivity around the company’s near future.

A recent report by Morningstar, a financial services firm based in Chicago, said that while the company’s “dairy business continues to underperform, down 6.5pc for the year and down 7.5pc in the fourth quarter”, it set a price target of €102 for the company.

This is down slightly on its previous price target.

Goodbody, the Dublin stockbroking firm, noted in a recent report that while the sector overall has been hit by rise bond yields, Kerry has “materially underperformed its peer group with the stock falling 28pc since April”.

However, it said, “we feel the share price reaction does not reflect the consistency of Kerry’s long-term performance”, while it expected that the likelihood of greater shareholder returns beyond this current phase of €300m-worth of stock buybacks should positively move the share price.

It too had a higher price target than Kerry is currently trading, at €99, though this was down from a previous figure of €109 late last year, a fact it attributed to a broader decline in the sector.

Goodbody said it expected a more encouraging outlook in 2024 as volumes in Kerry’s taste and nutrition division picked up in North America, after a period of de-stocking and shrinkflation.

Kerry’s “pipeline of innovation, particularly into foodservice, remains robust”, it said.

Berenberg, a German investment bank, was arguably even more bullish, claiming that Kerry’s shares had been “excessively dumped on the back of rising rates and GLP-1”, a reference to the advent of a swathe of new drugs that help people to lose weight fast, such as

Ozempic and Wegovy.

This had an impact on many companies involved in the food and nutrition sector, but Berenberg’s analysts felt Kerry had been disproportionately affected by such a market reaction.

The company would, it argued, benefit from improved investor sentiment in 2024, and indeed Edmond Scanlon, Kerry’s chief executive, has recently said that in fact such drugs offered an opportunity to the company to move to meet changing consumer demands.

Clearly Berenberg agree, and the bank set a buy-rating on the stock and a 12-month price target of €112, slightly down from its previous price target of €113, though still a good deal higher than Kerry is currently trading.

Weakness

What remains after all that is the question mark hanging over Kerry’s Dairy Ireland subsidiary, which has exhibited what one analyst described as “considerable weakness” in its volumes.

Goodbody noted that it “[maintained] muted revenue expectations given the uncertain macro backdrops, [but] we expect profit in the division to recover strongly to circa €60m EBITDA [earnings before interest, tax, depreciation and amortisation]” compared to a figure of €47m in 2023.

Scanlon has said he is “open to any inbounds” — that is, offers — on Dairy Ireland

The likeliest buyer, in truth, is Kerry Co-op, which holds 11.3pc of the shares of Kerry Group. To raise the money to buy the Dairy Ireland division — which three years ago was valued at €800m — the co-op might have to sell those Kerry shares, something that would have a big impact on the overall share price.

All of which means that the various parties — the farmers, the Kerry board, the equity analysts, and the various short-sellers — will be keeping a close eye on matters in Tralee the coming year.